A new breed of adviser is helping companies successfully navigate key capital markets.
CFO MagazineMarch 1, 2011Randy Myers - CFO Magazine
Thomas Bartlett was no stranger to the capital markets when he became CFO of Boston-based American Tower in April 2009. …
… So when Bartlett was called on just after arriving at American Tower to oversee a $300 million private placement of unsecured senior notes, he brought in a ringer to help out: Reuben Daniels, a veteran investment banker who two years ago co-founded EA Markets, an independent capital-markets advisory firm.
"I'd never done a high-yield deal, and I didn't have a lot of treasury experience in my new organization," Bartlett recalls. "So I brought in Reuben to help our treasurer work through the process of picking the banks and negotiating the fees."
It paid off. When the banks started talking about the fee structure, he says, Daniels immediately weighed in and described how it could be much lower. In the end, it was. "I know we saved money," Bartlett says.
This isn't how such negotiations usually get done. …
There are two problems with the standard go-it-alone approach, though. First, no matter how big or good the bank that is hired, it ultimately serves two masters: the issuer itself, and the institutional investors it must court to buy the issuer's stocks or bonds.
Second, the banks have far more knowledge about market conditions than their corporate clients do, and a greater appreciation for all the subtleties embedded in deal terms that can affect an issuer's costs and balance-sheet flexibility — from liquidity covenants on bond offerings to make-whole tables on convertible-debt transactions.
"The process of executing a transaction is a complex one, and very opaque for corporate issuers," says David Pritchard, another veteran capital-markets banker who recently helped launch a capital-markets advisory firm, Aequitas Advisors. "And there's some degree of intent behind that opacity in that banks, like any party in a financial transaction, like to be in a position where they have more information than the other guy."
Increasingly, however, companies are leveling the playing field by tapping a new breed of capital-markets adviser, like Reuben Daniels and David Pritchard, who have substantial investment-banking experience. They promise to represent an issuer's interests free of any potential conflict, and to help structure deals and underwriting syndicates in ways favorable to the issuer.
Image via WikipediaCompetitive, up to a Point …"The investment bank is clearly in the position of having two customers at the same time in the same transaction," says attorney Daniel Berick, a partner at Squire, Sanders & Dempsey. "It's got a product it wants to sell to its buy-side customers, and it's also going to get a fee for arranging that sale from the issuer."
But they're not. Their role is more like that of a real estate agent selling someone's house on commission. Both agent and seller gain from a higher sale price, but their interests are not wholly aligned. The homeowner may want to hold out for the highest possible price no matter how long it takes, for example, while the agent may want a quick sale to generate a higher return on his investment of time and marketing dollars. …
"The first part of the process is extremely competitive," says Pritchard, … "An enormous amount of thinking and analysis goes into the creation of those pitch books, which reflect the best ideas the banks have for you as an issuer: … But often, as soon as that process is done and the corporate client selects an investment bank, the competitive dynamics of the process fall away — in most cases, almost entirely." …
Conflict-Free Expertise
Nonetheless, Pritchard says firms like his can bring greater transparency and deal experience to the process to help companies improve transactions' efficiency and pricing. …
Theoretically, a savvy CFO or treasurer knows all these tricks — as well as what kinds of deals investors are receptive to buying at the time the company goes to market, what sorts of covenants those investors are demanding, and what similar issuers are paying for similar transactions. In reality, few CFOs or treasurers are in the market enough to have that sort of insight, nor do they have staff they can dedicate to that space — no matter how big their employer is. …
"I've had CFOs who have been very good, but they don't have the time or the background to be experts in all areas," observes private-equity investor Vincent Wasik, a principal at MCG Global. … "But I always like to have a consigliere, so to speak, who can help me and my CFO make the right decisions."
"I spend a lot of my time with banks," adds Martin Geller, CEO of Geller & Co., a financial advisory firm that, among other things, provides interim CFO services for corporate clients. "But the world's gotten complicated. Even someone like me can't spend 100% of his time on this." …
"All That, and More
Bartlett says Daniels was helpful on his company's notes offering in ways that went beyond pricing, too. American Tower was just in the process of getting an investment-grade rating, he says, "and he helped us dissect the different products the banks were proposing we might use, and to get his advice on our overall financial policy, not just in terms of where our leverage should be, but also in terms of how much fixed-rate versus floating-rate debt we should have and how much cash we should have on the balance sheet." With Daniels, he says, he was able to "knock stuff around that I generally couldn't with a banker, not because they're not good people with good ideas but because I really wanted an objective view." …
To be sure, not every capital-raising transaction requires the services of an independent adviser. "If a public company that's been in the market a couple of times is issuing common stock, it's not hard to understand how it gets priced and that underwriting discounts are pretty much the same," says Berick of Squire, Sanders. "…
"A Cheap Date"
But companies undertaking more-complex transactions may benefit from having an independent adviser. …
While neither Daniels nor Pritchard will say exactly how much their firms charge, Pritchard notes that it is a fraction of what investment banks earn on a capital-markets transaction. Bartlett says the price of Daniels's help at American Tower was a relative bargain compared with the cost of building the same expertise in-house. "It's a very effective way to get an objective view of the world, and I don't need to build or create a tremendous treasury function within my own organization to get it," he says.
Wasik, too, says that rather than spend money on permanent staff, he'd prefer to keep an independent adviser on retainer. "That," he says, "is a cheap date."
Randy Myers is a contributing editor of CFO.
Legal Liability: Little to None
Investment banks and their corporate clients have strong legal protections from lawsuits over debt and equity issuances.
Investment banks may cater to two sets of customers in capital-raising transactions, but from a legal standpoint securities attorneys say there's not much reason for them, or their corporate clients, to worry about conflict-of-interest liabilities.
For starters, most lawsuits alleging such conflicts on the part of investment banks have revolved around mergers and acquisitions, usually in the context of fairness opinions, notes Daniel Berick, a partner with law firm Squire, Sanders & Dempsey. …[Courts] have usually settled them on issues of fact particular to the individual transaction, or on the basis of the language of the engagement letter signed by the bank and its client.
By contrast, in a capital-raising context, "particularly for secondary offerings, companies generally don't sign an engagement letter with an underwriter to retain them as their agent and structure an offering for them," says Berick. "… So the investment-banking firm isn't acting as the agent of the issuer in quite the same way, in a legal sense, that it is when a company hires an investment bank to help it arrange an M&A transaction."
As for the liability of corporate officers and directors, if a lawsuit did claim that they entered into a poor deal, an important factor in their defense would likely be whether the transaction was consistent with a "pretty broad range" of what other bankers would have advised or offered in that situation, notes Alex Gendzier, a capital-markets partner with Jones Day. In that case, he says, they would likely have a strong defense based on the business judgment rule that governs many corporate decisions and presumes good faith in decision making, particularly if there is evidence that the parties did exercise good faith and performed reasonable due diligence.
Still, Gendzier notes, the law is always evolving, and any company or CFO that did use an independent adviser effectively could have a stronger defense if a deal were challenged in court.
That extra protection would make all the more sense, adds Berick, in the case of complex transactions.
"A plain-vanilla offering of securities sold at market price by a company that isn't in financial distress, has at least some experience as a capital-markets participant, and has a CFO who has been through the process a bunch of times doesn't create a lot of risk to the board or its executives from a fiduciary standpoint," Berick says. "But once you move away from that to an offering that's more complex — or if the board can't really tell itself with a straight face that the CFO is all over this stuff and knows exactly how it works — they might want to get some help." — R.M.
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